How subjectivity can add to objectives-based investing

May 29, 2016

Eric Sorensen: PanAgora chief executive

Objectives-based investing will shape funds management in future, especially with individual investors, who will continue to pay for manager insights but not so much for systematic strategies, according to Matt Olsen, the chief executive of Lonsec Research.

Olsen spoke last week at a briefing on ‘The Future of Funds Management’ organised by Pengana Capital for its new US-based sub-advisor PanAgora Asset Management. Pengana has launched a retail fund for PanAgora’s global market-neutral strategy which it describes as a “quantamental” process, blending quant with fundamental analysis.

Olsen said there would be even more pressure on costs in funds management in the future but Lonsec believed in active management and a key component in the value chain was for people to have advice. Index products would continue to evolve.

Eric Sorensen, the president and chief executive of PanAgora, described the evolution of quant investing from the 1980s, much of which he was part of, and how modern quant strategies differ from the early ones.

Every now again, quant strategies can suffer significantly from weight of money. Perhaps the most famous example was with what was known as ‘portfolio insurance’ in 1987, which let investors down during that year’s market crash. Also, in August 2007 in the US, crowding in certain strategies led to another quant sharp performance slump. Since then, good managers and institutional investors have been wary of the crowding trap.

A potential issue is that smart-beta strategies have become popular very quickly in the retail space and the factors on which they are based tend to have different cycles and cycles of different duration. Some commentators think that not all advisors are aware of what this can mean to an individual’s portfolio, especially in a situation involving crowding.

Sorensen said that “quantamental” investing required innovation, avoiding crowds and some subjectivity.

“Fundamental investing looks to identify the right stock. Quant investing creates a comprehensive portfolio system,” he said. The addition of fundamental processes to q quant style can mean both more alpha and reduced risk through the subjective overlay on things such as crowding.

Quant techniques are ideal for objectives-based strategies because they allow efficient use of multi-asset classes and long/short processes required for protection and target achievement.

Damian Crowley, Pengana’s head of distribution, said that optimal outcomes were increasingly achieved at “the intersection of multiple investment techniques”.

The PanAgora strategy, which has a six-year track record in the US and about US$700 million invested globally, was launched by Pengana for retail investors in December. It is currently on the Asgard and Macquarie Wrap platforms. Crowley said Australia had been promised about $1 billion of capacity.

PanAgora is no stranger to the local institutional market, having raised about $2 billion for its more traditional long-only quant strategies. The Boston-based manager, which is majority owned by the Power Financial Corporation, has about US$40 billion under management.